Column : Royalty runs in an MNC’s bloodstream
This data might also partially answer the question what is the right amount of royalty to be paid? The first-cut answer is, if a company is paying for a brand, its sales need to grow faster than others who are not paying for the brand. If it is paying for technology, its margins need to be higher than others not paying for technology. If not, there is no justification.
So, if companies are not seeing faster sales or higher profits, why are they paying so much more today?
The ownership structure goes a long way in explaining why this increase in royalty payments is asymmetric to the increase in sales or margin. The managements that negotiate the royalty arrangements are employed by the company with whom they negotiate. Loyalty runs in their bloodstream as they sit to negotiate with their own bosses. This is not conducive to head butting.
Investors, too, need to be hard-nosed if they want to keep these abusive payments in check. ACC and Ambuja Cements recently proposed to start charging higher royalty. Investors heaved a sigh of relief that it is only 1% of sales and only an additional R100 crore will be paid. But there is
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